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Chapter 5 Supply Chain Integration

Chapter 5 Supply Chain Integration

Qi Xu

Professor of Donghua UniversityTel: 021-62378860

E-mail: xuqi@dhu.edu.cn

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A new Supply Chain Paradigm

A shift from a Push System...Production decisions are based on forecast

…to a Push-Pull System

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The Old Paradigm: Push Strategies

Production decisions based on long-term forecasts

Ordering decisions based on inventory & forecasts

What are the problems with push strategies?Inability to meet changing demand patterns

Obsolescence

The bullwhip effect:Excessive inventory

Excessive production variability

Poor service levels

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A Newer Paradigm: Pull Strategies

Production is demand drivenProduction and distribution coordinated with true customer demandFirms respond to specific orders

Pull Strategies result in:Reduced lead times (better anticipation)Decreased inventory levels at retailers and manufacturersDecreased system variabilityBetter response to changing markets

But: Harder to leverage economies of scaleDoesn’t work in all cases

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Push-Pull Supply Chains

The Supply Chain Time Line

Low Uncertainty

Long lead times

High Uncertainty

Short lead times

CustomersSuppliers

PUSH STRATEGY PULL STRATEGY

Push-Pull Boundary

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A new Supply Chain Paradigm

A shift from a Push System...Production decisions are based on forecast

…to a Push-Pull SystemInitial portion of the supply chain is replenished based on long-term forecasts

For example, parts inventory may be replenished based on forecasts

Final supply chain stages based on actual customer demand.

For example, assembly may based on actual orders.

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Consider Two PC Manufacturers:

Build to StockForecast demand

Buys components

Assembles computers

Observes demand and meets demand if possible.

A traditional push system

Build to orderForecast demand

Buys components

Observes demand

Assembles computers

Meets demand

A push-pull system

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Push-Pull Strategies

The push-pull system takes advantage of the rules of forecasting:

Forecasts are always wrong

The longer the forecast horizon the worst is the

forecast

Aggregate forecasts are more accurateThe Risk Pooling Concept

Delayed differentiation is another exampleConsider Benetton sweater production

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What is the Best Strategy

Pull Push

Pull

Push

I

Computer

II

IV III

Demand uncertainty

(C.V.)

Delivery costUnit price

L H

H

L

Economies of Scale

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Selecting the Best SC Strategy

Higher demand uncertainty suggests pullHigher importance of economies of scale suggests pushHigh uncertainty/ EOS not important such as the computer industry implies pullLow uncertainty/ EOS important such as groceries implies push

Demand is stableTransportation cost reduction is criticalPull would not be appropriate here.

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Selecting the Best SC Strategy

Low uncertainty but low value of economies of scale (high volume books and cd’s)

Either push strategies or push/pull strategies might be most appropriate

High uncertainty and high value of economies of scale

For example, the furniture industry

How can production be pull but delivery push?

Is this a “pull-push” system?

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Characteristics and Skills

RawMaterial Customers

PullPush

Low Uncertainty

Long Lead Times

Cost Minimization

Resource Allocation

High Uncertainty

Short Cycle Times

Service Level

Responsiveness

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Locating the Push-Pull Boundary

The push section requires:Supply chain planningLong term strategies

The pull section requires:Order fulfillment processesCustomer relationship management

Buffer inventory at the boundaries:The output of the tactical planning processThe input to the order fulfillment process.

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Locating the Push-Pull Boundary

reduce inventory holding cost

the location of the push-pull boundary for various companies and industries

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5.6 Impact of the Internet – Expectations Were High

E-business strategies were supposed to:Reduce cost

Increase service level

Increase flexibility

Increase Profit

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5.6.1 The Book Selling Industry

From Push Systems...Barnes and Noble

...To Pull SystemsAmazon.com, 1996-1999No inventory, used Ingram Book Group to meet most demandWhy?

And, finally to Push-Pull SystemsAmazon.com, 1999-present

7 warehouses, 3M sq. ft.,Why the switch?

Margins, service, etc.Volume grew

Direct-to-Consumer:Cost Trade-Off

Cost Trade-Off for BuyPC.com

$0$2$4$6$8

$10$12$14$16$18$20

0 5 10 15

Number of DC's

Co

st (

$ m

illio

n)

Total Cost

Inventory

Transportation

Fixed Cost

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Industry Benchmarks:Number of Distribution Centers

Sources: CLM 1999, Herbert W. Davis & Co; LogicTools

Avg.# ofWH 3 14 25

Pharmaceuticals Food Companies Chemicals

- High margin product- Service not important (or easy to ship express)- Inventory expensiverelative to transportation

- Low margin product- Service very important- Outbound transportationexpensive relative to inbound

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5.6.2 The Grocery Industry

From Push Systems...Supermarket supply chain

...To Pull SystemsPeapod, 1989-1999

Picks inventory from storesStock outs 8% to 10%

And, finally to Push-Pull SystemsPeapod, 1999-present

Dedicated warehouses allow risk poolingStock outs less than 2%

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Challenges for On-line Grocery Stores

Transportation costDensity of customers

Very short order cycle times Less than 12 hours

Difficult to compete on costMust provide some added value such as convenience

Is a push-pull strategy appropriate?

What might be a better strategy?

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Less than 300,000 shoppers

NNuummbbeerr ooff ccuussttoommeerrss

AAvveerraaggee oorrddeerr

DDeelliivveerryy cchhaarrggeess

WWeebbvvaann 2211000000 $$7711 $$44..9955 ffoorr << $$5500 ffrreeee ffoorr >> $$5500

PPeeaappoodd 114400000000 $$112200 $$77..9955 ppeerr oorrddeerr

HHoommeeGGrroocceerr..ccoomm 5500000000 $$111100 $$99..9955 << $$7755 ffrreeee ffoorr >> $$7755

NNeettGGrroocceerr..ccoomm 6600000000 $$7700 $$22..9999 ffoorr << $$5500 $$44..9999 ffoorr >> $$5500

SShhooppLLiinnkk..ccoomm 33330000 $$9988 $$2255 mmoonntthhllyy

SSttrreeaammlliinnee..ccoomm 33440000 $$110000 $$3300

Source: D. Ratliff

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5.6.3 The Retail Industry

Brick-and-mortar companies establish virtual retail stores

Wal-Mart, K-Mart, Barnes & Noble, Circuit City

An effective approach - hybrid stocking strategy High volume/fast moving products for local storage ( Push)

Low volume/slow moving products for browsing and purchase on line (risk pooling) (Push-Pull)

Danger of channel conflict

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5.6.4 E-Fulfillment

How have strategies changed?From shipping cases to single items

From shipping to a relatively small number of stores to individual end users

What is the difference between on-line and catalogue selling?

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E-Fulfillment Requires a New Logistics Infrastructure

Traditional Supply Chain e-Supply Chain

Supply Chain Strategy Push Push-Pull

Shipment Type Bulk Parcel

Inventory Flow Unidirectional Bi-directional

Reverse Logistics Simple Highly Complex

Destination Small Number of Stores Highly Dispersed Customers

Lead Times Depends Short

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5.6.5 E-business Opportunities:

Reduce Facility Costs

Eliminate retail/distributor sites

Reduce Inventory Costs

Apply the risk-pooling conceptCentralized stocking

Postponement of product differentiation

Use Dynamic Pricing Strategies to Improve Supply Chain Performance

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E-business Opportunities:

Supply Chain VisibilityReduction in the Bullwhip Effect

Reduction in Inventory

Improved service level

Better utilization of Resources

Improve supply chain performanceProvide key performance measures

Identify and alert when violations occur

Allow planning based on global supply chain data

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5.7 Distribution Strategies

Warehousing

Direct ShippingNo DC needed

Lead times reduced

“smaller trucks”

no risk pooling effects

Cross-Docking

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3.7.1 Cross Docking

In 1979Kmart had 1891 stores and average revenues per store of $7.25 million

Wal-Mart was a small niche retailer in the South with only 229 stores and average revenues under $3.5 million

10 Years laterWal-Mart had

highest sales per square foot of any discount retailer

highest inventory turnover of any discount retailer

Highest operating profit of any discount retailer.

Today Wal-Mart is the largest and highest profit retailer in the world

Kmart ????

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What accounts for Wal-Mart’s remarkable success

This was achieved by way company replenished inventory the centerpiece of its strategy.Wal-Mart employed a logistics technique known as cross-docking

goods are continuously delivered to warehouses where they are dispatched to stores without ever sitting in inventory.

This strategy reduced Wal-Mart’s cost of sales significantly and made it possible to offer everyday low prices to their customers.

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Characteristics of Cross-Docking:

Goods spend at most 48 hours in the warehouseCross Docking avoids inventory and handling costs,Wal-Mart delivers about 85% of its goods through its warehouse system, compared to about 50% for KmartStores trigger orders for products.

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System Characteristics:

Very difficult to manageRequires advanced information technology. Why? What kind of technology?All of Wal-Mart’s distribution centers, suppliers and stores are electronically linked to guarantee that any order is processed and executed in a matter of hoursWal-Mart operates a private satellite-communications system that sends point-of-sale data to all its vendors allowing them to have a clear vision of sales at the stores

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System Characteristics:

Needs a fast and responsive transportation system. Why?Wal-Mart has a dedicated fleet of 2000 truck that serve their 19 warehousesThis allows them to

ship goods from warehouses to stores in less than 48 hoursreplenish stores twice a week on average.

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StrategyAttribute

DirectShipment

CrossDocking

Inventory atWarehouses

RiskPooling

TakeAdvantage

TransportationCosts

ReducedInbound Costs

ReducedInbound Costs

HoldingCosts

No WarehouseCosts

No HoldingCosts

DemandVariability

DelayedAllocation

DelayedAllocation

Distribution Strategies

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Transshipment

What is the value of this?

What tools are needed?

What if the system is decentralized?

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Important Considerations

Level of Uncertainty

Economies of Scale

Lead Time

Product Architecture

Supply Produce Distribute Sell

Plan/Design

Source

•Product Architecture•Make/Buy•Early Supplier Involvement

•Strategic Partnerships•Suppliers Selection•Supply Contracts

Fulfillment Supply Chain

Develo

pm

en

t Su

pp

ly

Ch

ain

The Enterprise Fulfillment and Development Supply Chains

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What is the Right Supply Chain Strategy for your Product?

L H

H

L

Demand Uncertainty

Innovative

Functional

•PC/Fashion•Responsiveness•Pull Systems•Dynamic Pricing

•Pasta/Diapers•Efficiency•Push System

•Cell Phone engines•Push Systems•Efficiency

•Furniture/Tires•Push-Pull•Lead Time Reduction

Push Pull

Modular

Integral

ProductsCharacteristic

Product Architecture

Supply ChainStrategy

Product IntroductionFrequency

C

DA

B

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The Development Supply Chain

Industry clock speedInnovative vs Functional products

Core competenciesMake vs. Buy

Product Design Postponement, Standardization, Packaging